Economist, Telegraph Columnist, Broadcaster

Politics Always Comes Back To The Economy

Every year, I get heavily involved in the party conference season, speaking at fringe meetings, gossiping with MPs and ministers and generally indulging my appetite for political intrigue.

Then, having made my annual visit to the ‘Westminster bubble’ – albeit away from Westminster – I feel an overwhelming urge to restate what I see as a universal truth.

For it really is ‘the economy, stupid’ – to borrow the celebrated campaign slogan that helped Bill Clinton secure the White House in the early 1990s. Economic growth, and the continuation or otherwise of financial stability, in the UK and elsewhere, will ultimately determine if the Tories win the next election. It’s the economy that matters when it comes to Jeremy Corbyn’s future and the outcome of the Brexit talks.

Politics is about the policies and personalities of the people involved – be they cabinet ministers, party activists or ordinary voters. All that is fascinating and important in understanding how our country is run. You can be as knowledgeable as you like, though, about the Westminster soap opera, who’s up and who’s down. But if you really want to read the political runes, you need to follow economics.

So, yes, I watched the Prime Minister’s disastrous conference speech in Manchester. It was unfortunate May was hobbled by a coughing fit and stupid prankster and she did well to carry on. Yet the speech itself, meant to re-launch her Premiership, was feeble – counter-productive on housing and with little else of any policy significance.

What really struck me, though, is that after May spoke, the pound hit a four-week low against the dollar, amid doubts about her durability and speculation the Bank of England may yet delay its first interest rate rise since July 2007. Having had it strongest month in September for over two years, sterling dipped – partly on May’s perceived weakness. But there’s also a growing sense the Bank won’t quite muster the courage to raise rates before Christmas, even though the Federal Reserve has hiked three times since January 2015, signaling the global interest rate cycle has turned.

After overdosing on politics, then, I wanted to highlight a few global economic realities. These are part of no-one’s mainstream political analysis but they could, over the coming months, massively impact Westminster, the Article 50 negotiations and the other perennials of headline political news.

The first relates to the withdrawal of global quantitative easing and interest rate normalization. Once these processes begin in earnest, bloated financial markets may take serious umbrage – upending politics everywhere.

We are, of course, in uncharted monetary waters. During the ten years since the financial crisis, central banks in the UK and US have expanded their balance sheets to an unprecedented degree. The European Central Bank is still at it, pursuing so-called ‘extraordinary measures’, as are its counterparts in China and Japan. The biggest policy question on the planet is what happens, and will financial markets collapse, when this turbo-charged money printing stops altogether.

As QE is withdrawn, can interest rates then be raised towards more normal levels across the globe – so they are at least greater than inflation, turning ‘real’ rates positive? That would stabilize banks and restore investment returns on a vast array on bonds and other financial instruments, finally laying the 2008 disaster to rest.

Such issues sound technical and inane. But they are absolutely vital in determining whether the UK economy keeps growing, or if global markets instead suffer another systemic ‘Lehman moment’, amidst a chronic loss of confidence.

Were that to happen, millions of British voters could lose patience with capitalism and the political and financial classes that run it. Extreme politics would be very much in vogue. There could be another ‘snap’ general election, after a Commons vote of no confidence in the Tories sparked by economic chaos. Corbyn, on his way to Downing Street, would be forced to have tea with the Queen.

Manynow argue there will be a ‘beautiful normalisation’ – and there may be. The Fed rate rises we’ve seen over the last two years have so far gone quite smoothly, with markets remaining calm. Other major nations need to join in, though, and QE must finally end. And until all that happens, dangers linked to the unwinding of extreme monetary measures will remain a major shadow over global markets, threatening to turn politics on its head.

Other global economic conundrums loom over Britain’s party political shenanigans. Will the US endure another ‘debt ceiling crisis’ this autumn? Will Congressional rows over more yet borrowing, postponed for now by the need to respond to hurricanes in Florida and Texas, spread fears of sovereign default?

Will China, the world’s second-biggest economy, keep booming? There is, after all, no sign of genuine reform. As President Xi Jinping nears the end of his first five-year term, his promised structural changes haven’t happened. The state-owned enterprises and the financial system that feeds them, remain bloated and opaque.

Will growing tension between the US and China result in a protectionist pile-up and broader global trade war? China’s vast trade surplus with the US means Trump may chose to provoke, calculating that Beijing has an incentive to give ground. But
Washington is vulnerable to a Chinese retort against US corporates and the risk Beijing starts devaluing the yuan again or – far worse –threatens to unload its vast holdings of US government debt.

Then there is the eurozone. Can the single currency hold together, as the money-printing stops? Or will a great euro unraveling cause global financial carnage? That, in my view, is the major systemic danger in the world today.

So, yes, party conferences are interesting – and fun. But when it comes to predicting politics, the dismal science is where it’s at.